Diseconomies of Scale

Growth usually brings cost advantages at first, but beyond a certain point, size can create new problems that push costs up.

Common causes include management and coordination difficulties, as more layers of management slow decisions and communication; reduced motivation, as employees in very large organisations may feel less connected to results; duplication of work across departments or regions; and strain on resources, such as rising wages when a company employs a large share of local workers or higher costs for transport and logistics over wider areas.

For example, a company that expands from one factory to twenty across many countries might find that its average cost per unit rises from 7 to 8, because of extra layers of management, slower decisions, complex logistics and duplicated systems.

Diseconomies of scale help explain why companies do not simply keep growing indefinitely, and why some large firms break themselves up, spin off divisions or decentralise decision-making.

The point at which economies of scale turn into diseconomies varies by industry and depends heavily on how well a business is organised and managed.